DC Auto Enrollment Spikes as Talk Turns to Automatic Increases

J. Kevin Fitzpatrick, executive vice president and chief administrative officer for Helzberg Diamond Shops Inc., knows his 2,600 participants’ average 401(k) account balance of $46,300 isn't enough to build a comfortable retirement nest egg. Fitzpatrick says automatically increasing employee contributions is the way to go, but the company can't afford it right now.

Like many companies, Helzberg, a North Kansas City, Missouri, jewelry franchiser, had to suspend matching contributions to the plan in 2008 to help survive the recession. The company is evaluating whether to reinstate the match, which was 100 percent on the first 3 percent of pay contributed, and half of the next 2 percent. Helzberg wouldn't be able to afford the match if it reintroduced it and increased all employee contributions annually, Fitzpatrick says.

“The more we escalate, the more we increase our cost,” Fitzpatrick says. “Business is tough right now, but I hope we get there eventually.”

Getting employees to save more for retirement is difficult for both employers and their workers. And while more companies are using an automatic feature to enroll employees into defined contribution plans, fewer are using another tool that would annually increase the amount of money workers contribute.

A recent survey of 210 employers by consulting firm Aon Hewitt showed 57 percent automatically enroll new workers into defined contribution plans, up from 24 percent in 2006, when a new federal law made it easier for employers to do so.

By comparison, less than half, or 47 percent, of defined contribution plans automatically increase participants' contributions. While the number of employers using automatic increases is up from 17 percent in 2006, 74 percent of employers that don't use this tool now say they are somewhat or very unlikely to use it in the future.

It's difficult for some employers to automatically increase contributions to employee retirement accounts. The Aon Hewitt study found that 24 percent of its respondents said the employer match expense was too high.

“Everyone agrees participants need to save more,” says Pam Hess, director of retirement research at Lincolnshire, Illinois-based Aon Hewitt. There is hesitation from employers to implement an automatic increase because “it feels like there is a lot of concern with what other companies are doing.”

Employers that utilize an automatic increase feature a default rate (usually 3 percent) of an employee’s pretax salary to start workers in the plan. Each year, the amount that is contributed from the employee's salary is increased automatically, usually by 1 percent. By law, employees are allowed to opt out of this program and employers can’t automatically pull more than 10 percent of worker pay into 401(k) accounts.

Starting employees at 3 percent of pay and not increasing that amount automatically may dupe them into believing they are saving enough for retirement, Hess says.

“We are fearful that plan sponsors are being too conservative” using this rate, Hess says, and she agrees that a 6 percent rate would be a better starting point for employees.

December 2010 data from T. Rowe Price show participants with automatic contribution increases save slightly more at 7.05 percent vs. the 6.9 percent rate for participants who increase contributions on their own.

Employees who have higher automatic contribution rates have only a 15 percent dropout rate, says Judi Knott, vice president of retirement planning services for the Baltimore-based investment management company.

“For some [employers], 6 percent feels like a leap, but it really is an ideal starting point,” Knott says.

Fitzpatrick thinks 6 percent is too high and could prevent employers from making automatic contribution increases.

“To require it is unduly intrusive,” he says. “If the burden becomes too great [for employers] then everybody loses.”

Kevin Crain, Bank of America Merrill Lynch's head of institutional client relationships, says automatic increases aren't always the solution. About 46 percent of Bank of America's 401(k) plan sponsors use either automatic increases or another tool that allows participants to change the status of their accounts online. In 2010, 77 percent of its 1.5 million participants started or increased contributions, compared with 70 percent in 2009.

“The question is: How do I get the employee engaged for long-term retirement success,” Crain says. “There's not just one answer.”